RBC Economist: US Headed for Slower Growth Even Before Superstorm

U.S. industrial output unexpectedly fell in October as Superstorm Sandy disrupted production, but the underlying tone remained consistent with slowing manufacturing activity.

Industrial production contracted 0.4 percent last month after a 0.2 percent increase in September, the Federal Reserve said on Friday.

The Fed said the storm, which tore through the East Coast at the end of October, is estimated to have reduced the rate of change in output by nearly 1 percentage point. It cut the output of utilities, chemicals, food, transportation equipment, and computers and electronic products, the Fed said.

Economists had expected a 0.2 percent gain in industrial output last month. The storm is estimated have caused $50 billion in damage.

Aside from the storm's impact, the trend in industrial production is biased towards weakness as fears over higher taxes and sharp cuts in government spending deter businesses from ramping up production and capital investment.

Cooling global demand is also crimping output.

The so-called fiscal cliff could drain about $600 billion from the economy early next year unless Congress agrees on an orderly plan to cut rising budget deficits.

"The big thing that stands out is the declines in business equipment, machineries and construction supplies. When you see that kind of weakness, you can't really attribute it to the storm," said Christopher Low, chief economist at FTN Financial in New York.

"It's a pattern of weakness that has happened in the past three months. The most likely explanation is the weakness in capital equipment orders, which could be attributed to caution about the fiscal cliff and its possible impact on the economy."

U.S. stocks were volatile on Friday as investors remained skeptical a meeting between President Barack Obama and congressional leaders would make progress on dealing with the fiscal cliff. Treasury debt prices were up slightly.

Last month, utilities output fell 0.1 percent after being flat in September. Production at mines increased 1.5 percent after rising 0.9 percent the prior month.

Manufacturing production fell 0.9 percent as motor vehicle output declined for a third straight month. Manufacturing had gained 0.1 percent in September.

Excluding the effects of the storm, manufacturing output was little changed from its September level, the Fed said.

The factory operating rate slipped to 75.9 percent in October, the lowest level since November 2011. Capacity utilization at factories is 2.9 percentage points below its long-run average.

"The problem is that we were already seeing a slowing in the sector and so it is difficult to disentangle what is going on. We are poised for a ratcheting down in economic growth," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

Capacity utilization, a measure of how fully firms are using their resources, fell to 77.8 percent — the lowest level since November 2011 — from 78.2 percent in September. That was 2.5 percentage points below its long-run average.

Officials at the Fed tend to look at utilization measures as a signal of how much "slack" remains in the economy — how far growth has room to run before it becomes inflationary.

U.S. industrial output unexpectedly fell in October as superstorm Sandy disrupted production, but the underlying tone remained consistent with slowing manufacturing activity.
Industrial production contracted 0.4 percent last month after a 0.2 percent increase in September,...